Inflation in the United States vs. Europe – A Tale of Two Continents



Yes, inflation is currently a global phenomenon

Global supply factors related to supply chain disruptions and energy markets (see Chart 1 below) clearly explain much of the recent rises in key inflation measures in advanced economies . The persistence of this inflationary pressure is due to factors such as production or transport bottlenecks and rising input prices.

These factors are mostly global in nature, and since they are supply rather than demand driven, domestic monetary policy actions are likely to have only a limited effect on them. In short, the sooner there is an easing of tensions in supply chains, the sooner we will see inflationary pressures fade everywhere.

Figure 1: Pressures on the global supply chain remain high, but may have started to moderate – the graph shows the evolution of the global supply chain index between September 1997 and December 2021

Source: Federal Reserve Bank of New York, as of 04/02/2022

Important differences between the United States and the euro zone

Beyond these global factors, there are fundamental differences, particularly in labor markets, which lead us to believe that it is inappropriate to transpose the outlook for inflation in the United States to the euro zone (the situation of the UK being, not the first time, somewhere in between).

We consider the US economy to be at or already below full employment. The labor market is tight with approximately 10.5 million open positions. Fed Chairman Powell’s comments after the FOMC meeting at the end of January suggest to us that policymakers have concluded that inflation is becoming cyclical and persistent.

We therefore expect the FOMC to raise the federal funds rate by at least 0.25% at each of its seven policy meetings in 2022 and continue in 2023 until US policy rates reach 2 .5% (in line with the Fed’s view of “neutrality”). .

With the FOMC’s core inflation forecast above target throughout its forecast horizon and likely to be revised upwards if wages do not moderate in the coming months, it is all quite possible that rates should enter restrictive territory.

A warmongering tone at the ECB

President Lagarde, meanwhile, struck a clearly hawkish tone on upside inflation risks in the eurozone at the ECB’s February 3 press conference. Policy action is not imminent, but the ECB clearly sees inflation risks now on the upside. She noted that inflationary concerns were “unanimous” among Governing Council members as recent data on high headline inflation, still driven by energy, shows broader inflationary pressures extending to the basics. of the basket.

An upward trend in core inflation, together with expectations of further improvements in the labor market and inflation expectations stabilizing around the target, suggest that the ECB now views inflation as stabilizing at elevated levels for some time, potentially a precondition for a rate hike.

Of particular note is a change in language on rate hikes, as Lagarde no longer calls a 2022 hike “highly unlikely,” but instead stresses that any decision will be data-driven.

The ECB will do less than the Fed

In our view, due to a significantly wider output gap and a greater slowdown in labor markets, the ECB is not about to embark on a cycle of rate hikes of the same magnitude. we expect from the Federal Reserve.

As the European labor market tightens, real wage gains are unlikely to greatly outpace productivity gains – wage increases will be part of the price adjustment rather than the trigger for a wage-price spiral.

In the United States, on the other hand, the acute labor shortage is much more conducive to an acceleration in wages which could lead to important pass-through and second-order effects.

As a result, while the ECB may take its foot off the accelerator in the coming months, we think the Fed is much more likely to be the central bank that needs to step on the brakes.

Nevertheless, with the ECB, the Fed and the Bank of England now all heading towards shrinking their balance sheets and raising policy rates, investors should be prepared for higher real yields and a reversal of the effects on the portfolio balance.


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